Cleveland State University
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Cleveland State Law Review
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1-1-2002
Should Banks Be Permitted to Engage in Real
Estate Brokerage and Management Services: How
the Current Debate Demonstrates the
Inadequacies of the Gramm-Leach-Bliley Act
Patrick J. Burke
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Recommended Citation
Note, Should Banks Be Permitted to Engage in Real Estate Brokerage and Management Services: How the Current Debate
Demonstrates the Inadequacies of the Gramm-Leach-Bliley Act, 50 Clev. St. L. Rev. 103 (2002-2003)
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SHOULD BANKS BE PERMITTED TO ENGAGE IN
REAL ESTATE BROKERAGE AND MANAGEMENT
SERVICES?: HOW THE CURRENT DEBATE
DEMONSTRATES THE INADEQUACIES OF THE
GRAMM-LEACH-BLILEY ACT
I. INTRODUCTION .................................................................... 103
II. A BRIEF HISTORY OF FINANCIAL SERVICE REGULATION .... 105
A. National Bank Act of 1863 .......................................... 105
B. Glass-Steagall Act of 1933 ......................................... 105
C. Bank Holding Company Act of 1956 .......................... 106
III. MODERNIZATION OF FINANCIAL SERVICES REGULATION THE GRAMM-LEACH-BLILEY ACT ...................................... 107
A. Background and Legislative History of the
Gramm-Leach-Bliley Act ............................................. 107
B. The Emergence of a New Standard ............................. 110
IV. PENDING LEGISLATION ........................................................ 111
A. Joint Proposal of the Federal Reserve Board
and Secretary of the Treasury ..................................... 111
B. The Community Choice in Real Estate Act ................. 114
V. TWO SIDES TO EVERY STORY .............................................. 115
A. Arguments in Favor of Permitting Real Estate
Brokerage and Management Activities ....................... 115
B. Counter-Arguments of the National Association
of REALTORS® and Others ....................................... 117
VI. THE PROPOSED RULE HIGHLIGHTS THE INADEQUACIES OF THE
GRAMM-LEACH-BLILEY ACT ............................................. 119
A. The Language Employed is too Broad to
Accomplish the Goals of the Act ................................. 119
B. Roles of the Legislature and Regulators not
Clearly Defined ........................................................... 123
C. The Scope of the Rule is Too Expansive ...................... 125
VII. CONCLUSION ....................................................................... 126
I. INTRODUCTION
Representing the most comprehensive reform of the financial services industry in
nearly seventy years, President Clinton signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law on November 12, 1999.1 The Act included
1
Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. L. No. 106-102, 113
Stat. 1338 (codified as amended in scattered sections of 12 U.S.C.).
103
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provisions designed to facilitate affiliation among banks, securities firms and
insurance companies,2 as well as provisions requiring financial service companies to
disclose the institutions’ privacy policies with respect to nonpublic personal
information.3 To foster competition and innovation in the financial services industry,
title I of the Act repealed sections 20 and 32 of the Glass-Steagall Act 4 and amended
section 4 of the Bank Holding Company Act of 1956.5 While the primary focus of
title I was to break down the firewalls between banks, securities firms, and insurance
companies by creating financial holding companies, the Act includes a provision that
allows these newly created financial institutions to engage in any activity that is
determined “to be financial in nature or incidental to such financial activity.”6 One
of the first major efforts by regulators to expand the list of permissible activities
under the Gramm-Leach-Bliley Act is to allow financial holding companies and
financial subsidiaries of nationally chartered banks to engage in real estate brokerage
and real estate management services.7
Part II of this Note will provide a brief history of the financial service regulations
that preceded the Gramm-Leach-Bliley Act. Part III will discuss the legislative
history of the Gramm-Leach-Bliley Act, provide a brief overview of the Act, and
detail the provision which may allow financial holding companies to engage in real
estate brokerage and management activities. Part IV of this Note will discuss the
pending legislation on this issue, including the proposed rule requesting public
comment and the current bills in the House and Senate against allowing banks to
engage in the proposed activities. Part V will detail the arguments on both sides of
the issue, primarily from the perspective of industry groups. Finally, Part VI of this
Note will explain how the current proposal to permit banks to engage in real estate
brokerage and management activities highlights the inadequacies of the GrammLeach-Bliley Act.
2
Gramm-Leach-Bliley Financial Modernization Act §§ 101- 161.
3
Id. § 501- 527.
4
Banking Act of 1933 (Glass-Steagall Act), Pub. L. No. 73-66, 48 Stat. 162 (codified as
amended in scattered sections of 12 U.S.C.).
5
12 U.S.C. § 1843 (2000).
6
Id. § 1843(k)(1)(A).
7
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307 (Jan. 3, 2001)
(to be codified at 12 C.F.R. pt. 225). In addition to the proposed rule, the Federal Reserve
Board and the Secretary of the Treasury have issued three other proposals to expand the list of
permissible activities under the Gramm-Leach-Bliley Act. The first related to banks acting as
“finders” (putting buyers and sellers together in transactions negotiated by the buyers and
sellers themselves). The second involved safeguarding and transferring financial assets and
facilitating financial transactions for third parties. The third concerned a determination of
whether certain types of expanded data processing activities are complementary to financial
activities. Hearings, infra note 80 (statement of Hon. Laurence H. Meyer, Member, Board of
Governors of the Federal Reserve System). At the time of this writing, only the proposal
regarding banks acting as “finders” has been finalized. Bank Holding Companies and Change
in Bank Control, 12 C.F.R. § 225.86 (2001).
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II. A BRIEF HISTORY OF FINANCIAL SERVICE INDUSTRY REGULATION
A. The National Bank Act of 1863
The American financial service industry has historically been heavily regulated,
with three laws bearing particular significance to the events that led to the enactment
of the Gramm-Leach-Bliley Act. The first influential regulation was the National
Bank Act of 1863.8 Promulgated at the height of the Civil War, the National Bank
Act of 1863 created the dual bank regulation system that is particular to America and
is still prevalent today.9 Under this dual system, banks may choose to be statechartered banks or federally-chartered national banks.10 One of the primary factors
considered when deciding between a state or national charter is the difference
between regulating bodies.11 Nationally chartered banks fall under the regulatory
aegis of the Office of the Comptroller of the Currency, a division of the Department
of the Treasury.12 State banks are primarily regulated by the regulating bodies in
their respective states, and can be subjected to federal regulation by electing to
become a member of the Federal Reserve System or by insuring deposits through the
Federal Deposit Insurance Corporation.13 Though the emergence of state wild card
statutes14 and federal preemption15 has had a smoothing effect on the differences
between federal and state banking charters, the dual banking system remains an
integral part of the U.S. banking system.16
B. The Glass-Steagall Act of 1933
The next major law affecting the powers of U.S. banking institutions was the
Glass-Steagall Act of 1933.17 The Glass-Steagall Act was enacted during the Great
Depression in response to the financial crisis that began with the stock market crash
of 1929 and led to widespread bank failures, eroding the public confidence in the
8
National Bank Act of 1863, ch. 58, 12 Stat. 665, repealed by National Bank Act of 1864,
ch. 106 § 62, 13 Stat. 99 (codified as amended in scattered sections of 12 U.S.C.)
9
Henry N. Butler & Jonathan R. Macey, The Myth of Competition in the Dual Banking
System. 73 CORNELL L. REV. 677, 681 (1988).
10
National Bank Act of 1863 at 668.
11
Butler, supra note 9, at 682.
12
Id. at 677.
13
Id.
14
Id. at 705. Wild card statutes is the generic name given to statutes that “automatically
grant state banks the same powers as national banks whenever a change occurs in the laws
affecting national banks.” Id. A majority of states have adopted such statutes. Id.
15
Id. at 694. Under the Supemacy Clause of the U.S. Constitution, federal laws will
preempt state laws when there is a direct conflict. With respect to banks and other financial
service providers, “the federal government has passed preemptive legislation in the important
areas of reserve requirements, separation of commercial banking from investment banking,
and the regulation of bank holding companies.” Id.
16
Butler, supra note 9, at 678.
17
Banking Act of 1933.
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banking industry as a whole.18 The enactment of the Glass-Steagall Act “was
predicated on the assumption that the securities activities of commercial banks and
their affiliates played a significant role in the stock market crash.”19 The broad
objectives of the Glass-Steagall Act were to restore confidence in the commercial
banking system and to eliminate perceived inherent conflicts of interest by separating
commercial banking activities from investment banking activities.20 The results were
the prohibition of Federal Reserve member banks from affiliating with organizations
principally engaged in the investment banking business,21 the prohibition of
investment banks from participating in commercial banking,22 and the prohibition of
management interlocks between commercial banks and securities firms.23
C. The Bank Holding Company Act of 1956
The regulatory scheme set forth by the Glass-Steagall Act appeared adequate
until the early 1950’s when “banks circumvented section 20 [of the Glass-Steagall
Act] by forming bank holding companies, which were allowed to control both
commercial banking and investment banking subsidiaries.”24 The Bank Holding
Company Act of 1956,25 however, closed this loophole by limiting ownership of
nonbanking subsidiaries to subsidiaries that engaged in activities determined to be
“so closely related to banking or managing or controlling banks as to be a proper
incident thereto.”26 Despite the restrictions of the Bank Holding Company Act, the
bank holding company remains the most prevalent organizational structure for banks
in the United States today.27
Through “Regulation Y,” the Federal Reserve Board has continually added to the
list of activities determined to be “closely related to banking.”28 An example of an
activity added to the list of permissible activities under the Bank Holding Company
Act is certain courier or high speed transportation services.29 The Federal Reserve
18
A.J. Herbert III, Comment: Requiem on the Glass-Steagall Act: Tracing the Evolution
and Current Status of Bank Involvement in Brokerage Activities, 63 TUL. L. REV. 157, 161-62
(1988).
19
Id. at 162.
20
Id.
21
12 U.S.C. § 377 (2000), repealed by Gramm-Leach-Bliley Act of 1999, Pub L. No. 106102, 113 Stat. 1338.
22
12 U.S.C. § 378 (2000).
23
12 U.S.C. § 78 (2000), repealed by Gramm-Leach-Bliley Act of 1999, Pub L. No. 106102, 133 Stat. 1338.
24
Herbert, supra note 18, at 169-70.
25
Bank Holding Company Act of 1956, Pub. L. No. 84-511, 70 Stat. 133 (codified as
amended in scattered sections of 12 U.S.C.).
26
12 U.S.C. § 1843(c)(8).
27
Herbert, supra note 18, at 170.
28
Bank Holding Companies and Change in Bank Control, 12 C.F.R. § 225.4 (2001).
29
Nat’l Courier Ass’n v. Bd. of Governors of the Fed. Reserve Sys., 516 F.2d 1229, 1232
(D.C. Cir. 1975).
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Board added these activities to the list in 1972.30 In 1975, a courier association
challenged the regulation allowing bank holding companies to engage in such
activities, claiming, in part, that the activities were not “closely related to banking.”31
The D.C. Court of Appeals set the standard for determining whether or not an
activity is “closely related to banking” in National Courier. The Court stated that the
Federal Reserve Board must “articulate the ways in which banking activities and the
proposed activities are assertedly connected, and must determine, not arbitrarily or
capriciously, that the connections are close.”32 The court then enumerated a number
of factors for the Federal Reserve Board to consider in determining whether a
proposed activity is “closely related to banking.”33
While the “closely related to banking” standard would remain in effect until the
Gramm-Leach-Bliley Act, the restrictions imposed by both the Glass-Steagall Act
and the Bank Holding Company Act gradually decreased over time, “primarily from
more permissive interpretations by the regulatory agencies, and . . . from deference
to these interpretations by the courts,”34 culminating in the enactment of the GrammLeach-Bliley Act.
III. MODERNIZATION OF FINANCIAL SERVICES REGULATION –
THE GRAMM-LEACH-BLILEY ACT
A. Background and Legislative History of the Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act was the result of years of debate over regulation of
the financial services industry. The Act “[did] not represent a dramatic departure
from what was already happening in the marketplace with the acquiescence of
federal and state regulators,”35 but was merely a codification of the eroding divisions
between banks, securities firms, and insurance companies. While industry groups
had been calling for the repeal of the Glass-Steagall Act and the reformation of
financial services regulation for years, the effort received a big push by the
announcement of a proposed merger between industry giants Citicorp and Travelers
Insurance.36 While the merger was technically impermissible under the law,
30
Bank Holding Companies and Change in Bank Control, 12 C.F.R. § 225.86 (2001).
31
Nat’l Courier Ass’n, 516 F.2d at 1232.
32
Id. at 1237.
33
Id. The court enumerated the following factors for the Federal Reserve Board to
consider, which, if met, would support a finding that an activity is closely related to banking:
1.
Banks generally have in fact provided the proposed services.
2.
Banks generally provide services that are operationally or functionally so
similar to the proposed services as to equip them particularly well to provide
the proposed service.
3.
Banks generally provide services that are so integrally related to the
proposed services as to require their provision in a specialized form. Id.
34
Herbert, supra note 18, at 171.
35
Douglas P. Faucette, The Impact of Convergence and the Gramm-Leach-Bliley Act on
the Insurance Industry, 8 GEO. MASON L. REV. 623, 647 (2000).
36
See Yvette D. Kantrow & Liz Moyer, Citi, Travelers: A Global Leader Takes Shape,
THE AM. BANKER, Apr. 7, 1998, at 1. On April 6, 1998 Citicorp and Travelers Insurance
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“Citigroup [was] betting that regulators [would] allow it up to five years to divest
impermissible activities, and that Congress [would] enact enabling legislation before
the five-year period expire[d].”37 Apparently confident that Congress would do just
that, a number of large financial institutions announced mega-mergers in the wake of
the Citigroup announcement. Within two weeks of the Citigroup announcement,
Nationsbank and Bank of America announced a merger agreement, creating the
largest bank in the United States. On that same day, Banc One Corporation and First
Chicago NBD Bank announced plans to join, creating by far the largest midwest
bank.38 While the success of the latter mergers was not contingent upon the repeal of
the Glass-Steagall Act as was the Citigroup deal, the announcements were a clear
indication that the nation’s preeminent banks were posturing for the imminent
changes to come.
An early version of the Gramm-Leach-Bliley Act was introduced in 1998 as H.R.
10 and it passed in the House by a single vote.39 The bill then went to the Senate;
however, after much debate and compromise in the Senate Banking Committee, the
congressional session ended before the bill made it to the Senate floor for a vote.40
The bill, however, would find new life when Congress reconvened the following
year, when “[i]n January 1999, Representative James A. Leach (R-Iowa), Chairman
of the House Banking and Financial Services Committee, reintroduced H.R. 10,
which was based largely on the Senate compromise bill drafted the prior year.”41
The House Banking Committee held hearings on the bill shortly thereafter, as did the
House Commerce Committee headed by Chairman Thomas Bliley (R-Va). The bill
was passed by the House of Representatives on July 1, 1999, by a vote of 343-86.42
Senator Phil Gramm (R-Tex), Chairman of the Senate Banking Committee,
introduced a more streamlined financial modernization bill, also in early 1999.43
While the vote was along partisan lines, the republican-controlled Senate passed this
bill with a 54-44 vote on May 6, 1999.44 A compromise bill was compiled in the fall
of 1999, which passed both houses of Congress on November 4, 1999.45 The
announced a $70 billion merger which would create the largest financial services company in
the world, to be known as Citigroup, with nearly $700 billion in assets. Id.
37
William M. Isaac, Challenge to Policymakers-and Dealmakers Too; As Lawmakers
Fiddle, Market Forces Transforming the Financial Industry, THE AM. BANKER, Apr. 24, 1998,
at 7.
38
Id.
39
Douglas P. Faucette, The Impact of Convergence and the Gramm-Leach-Bliley Act on
the Insurance Industry, 8 GEO. MASON L. REV. 623, 626 (2000).
40
Id.
41
Id. at 626-27.
42
Id. at 627.
43
Id. at 627.
44
Faucette, supra note 39, at 628.
45
Id. at 629.
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Gramm-Leach-Bliley Act was signed into law by President Clinton on November 12,
1999.46
The Gramm-Leach-Bliley Act created a vehicle known as the “financial holding
company,” which greatly expanded the scope of permissible activities for banks and
other financial service providers.47 According to the Act, a financial holding
company is authorized to engage in the same activities as bank holding companies48
(either directly or through nonbank subsidiaries), and is further permitted to engage
in activities deemed to be “financial in nature or incidental to a financial activity.”49
In order for a bank holding company to qualify as a financial holding company, it
must make application to the Federal Reserve and meet the specific guidelines
outlined by that agency.50 Essentially the Act requires that each of the depository
institutions controlled by the financial holding company is well-capitalized,51 wellmanaged,52 and must have received a Community Reinvestment Act rating of
“satisfactory” or “outstanding.”53 If a bank holding company does not meet of each
of these specific criteria, it will not be granted financial holding company status.54
Furthermore, if a financial holding company fails to remain in compliance with these
requirements, it may be forced to divest itself of financial activities not available to
bank holding companies.55
Although the Gramm-Leach-Bliley Act created the financial holding company
structure, the traditional bank holding company structure still remains an option.56
Therefore, bank holding companies that do not meet the specific requirements for
financial holding company status (well-capitalized, well-managed, and in
satisfactory compliance with the Community Reinvestment Act) can nonetheless
continue to own bank and nonbank financial subsidiaries. The Act did not change
the fact that any activities in which a bank holding company wishes to engage in
46
Id.
47
12 U.S.C. § 1841(p) (2000).
48
12 U.S.C. § 1843(j)(4)(C).
49
12 U.S.C. § 1843(k)(1)(A).
50
12 U.S.C. § 1843(l).
51
12 U.S.C. § 1843(l)(A). The Federal Reserve considers a domestic bank, thrift or trust
company to be well-capitalized where it has a total risk based capital ratio of not less than ten
percent, a Tier 1 capital ratio of not less than six percent, and a leverage ratio of not less than
five percent. Bank Holding Companies and Change in Bank Control, 12 C.F.R. § 225.2(r)
(2001).
52
12 U.S.C. § 1843(l)(B). The Federal Reserve considers a domestic bank, thrift or trust
company to be well-managed if in its latest examination it received a composite rating of at
least “satisfactory” and a management rating of at least “satisfactory.” 12 C.F.R. § 225.2(s)(1)
(2001).
53
12 C.F.R. § 225.82(d) (2001).
54
12 U.S.C. § 1843(l)(c).
55
12 U.S.C. § 1843(m).
56
See generally 12 U.S.C. § 1843(c)(8).
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must be “closely related to banking.”57 There is, however, one caveat. The GrammLeach-Bliley Act amended the Bank Holding Company Act so that bank holding
companies could only engage in activities that had been determined by the Federal
Reserve Board to be “closely related to banking” as of November 11, 1999, the day
before Gramm-Leach-Bliley’s enactment.58 This essentially froze bank holding
companies in time, requiring any institution wishing to engage in activities not
permitted prior to the Act to qualify as a financial holding company. Thus, while the
bank holding company structure may continue to be a viable option for institutions
with no intention of expanding present product offerings beyond what was
previously allowed, or for institutions that are unable to meet the heightened
requirements for financial holding company status, the financial holding company
will likely be the vehicle for continued evolution of the financial services industry,
with bank holding companies decreasing significantly in number, possibly towards
extinction.
B. The Emergence of a New Standard
The Gramm-Leach-Bliley Act enumerated a number of activities that are
permissible for financial holding companies and financial subsidiaries of national
banks.59 In order to adapt to changes in the financial marketplace, the GrammLeach-Bliley Act amended the Bank Holding Company Act to include a provision
that allows the Federal Reserve Board to determine permissible activities for
financial holding companies.60 Prior to the enactment of the Gramm-Leach-Bliley
Act and the creation of the financial holding company, the Federal Reserve Board
was required to find that a proposed activity was “closely related to banking” if it
was to be a permissible activity for bank holding companies.61 Under the GrammLeach-Bliley Act, however, the Board must only determine that the proposed activity
is “financial in nature or incidental to such financial activity; or is complementary to
57
Id.
58
Id.
59
The Gramm-Leach-Bliley Act states that the following activities shall be considered to
be financial in nature:
(A)
Lending, exchanging, transferring, investing for others, or safeguarding
money or securities.
(B)
Insuring, guaranteeing, or indemnifying against loss harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as principal,
agent, or broker for purposes of the foregoing, in any State.
(C)
Providing financial, investment, or economic advisory services, including
advising an investment company. . .
(D)
Issuing or selling instruments representing interests in pools of assets
permissible for a bank to hold directly.
(E)
Underwriting, dealing in, or making a market in securities.
(F)
Engaging in any activity that the Board has determined, by order or regulation
that is in effect on November 12, 1999, to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
12 U.S.C. § 1843(k)(4)(A)-(F) (2000).
60
Id.
61
12 U.S.C. § 1843(c)(8).
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a financial activity and does not propose a substantial risk to the safety or soundness
of depository institutions or the financial system generally.”62 This provision of the
Act has spurred a renewed effort to allow financial holding companies and financial
subsidiaries of national banks to engage in real estate brokerage and management
services.
The banking industry has tried unsuccessfully to gain permission to engage in
real estate brokerage and management services in the past. In 1972, the Federal
Reserve Board determined that real estate brokerage was “not closely related to
banking” for purposes of the Bank Holding Company Act.63 In 1987, however, the
Board solicited public comment on a proposal to allow bank holding companies to
engage in real estate investment activities.64 The proposal included a provision that
would have allowed banks to engage in “activities that are incidental to the
ownership of real property, such as property management, maintenance and
brokerage activities conducted in connection with real estate in which the bank had
an interest,”65 though it did not propose to allow bank holding companies to engage
generally in such activities. The proposal, however, was never adopted in its final
form.66 The issue is now being revisited by the Federal Reserve Board and the
Secretary of the Treasury, because “[t]he [a]gencies believe that the [Gramm-LeachBliley] Act’s ‘financial in nature or incidental’ standard represents a significant
expansion of the ‘closely related to banking’ standard that the Board previously
applied in determining the permissibility of activities for bank holding companies.”67
IV. PENDING LEGISLATION
A. Joint Proposal of the Federal Reserve Board and the Secretary of the Treasury
As previously noted, the Gramm-Leach-Bliley Act provides a means by which
the list of permissible activities in which a financial holding company may engage
could be expanded beyond the list enumerated in the Act itself.68 The Act requires
coordination between the Federal Reserve Board and the Secretary of the Treasury
wherein each agency must notify the other of any “request, proposal or application
. . . for a determination of whether an activity is financial in nature or incidental to a
financial activity.”69 The agency that did not receive the initial request then has
62
12 U.S.C. § 1843(k)(1)(A),(B).
63
Bank Holding Companies and Change in Bank Control, 12 C.F.R. § 225.126(c)(2001).
The Federal Reserve Board has determined that the following activities are not closely related
to banking as to be a proper incident thereto: insurance premium funding; underwriting life
insurance not sold in connection with a credit transaction; real estate brokerage; land
development; real estate syndication; management consulting; and property management. 12
C.F.R. § 225.126 (2001).
64
Bank Holding Companies and Change in Bank Control, 52 Fed. Reg. 543 (1987).
65
Id.
66
Id.
67
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307, 308.
68
See generally 12 U.S.C. § 1843(k).
69
12 U.S.C. § 1843(k)(2)(A)(i).
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thirty days to notify the other agency, in writing, of its belief that the activity is not
financial in nature or incidental to a financial activity.70
If neither agency objects to a request, the agencies may then initiate a public
rulemaking to find the activity permissible under the Act.71 The Act enumerates the
factors which the agencies are to consider when making a determination of whether
an activity is financial in nature or incidental to a financial activity, which are:
(A)
the purposes of [the Bank Holding Company Act] and the
Gramm-Leach-Bliley Act;
(B)
changes or reasonably expected changes in the marketplace in
which financial holding companies compete;
(C)
changes or reasonably expected changes in the technology for
delivering financial services, and;
(D)
whether such activity is necessary and appropriate to allow a
financial holding company and the affiliates of a financial
holding company to-- (i) compete effectively with any company
seeking to provide financial services in the United States.72
Shortly after the enactment of the Gramm-Leach-Bliley Act, the American
Bankers Association73 and Fremont National Bank & Trust Company74 revisited the
possibility of allowing banks to offer real estate brokerage and management services
by petitioning the Federal Reserve Board and the Secretary of the Treasury to
determine that the activities are financial in nature under the expanded standard set
forth in the Act.75 Two additional trade associations, the Financial Services
Roundtable76 and the New York Clearing House Association77 also requested that the
70
12 U.S.C. § 1843(k)(2).
71
Id.
72
Id. § 1843(k)(3).
73
The American Bankers Association is based in Washington, D.C. and represents banks
on issues of national importance. The ABA was founded in 1875 and represents all categories
of banking institutions including community, regional and national banks and holding
companies, savings banks and institutions, and trust companies. See ABA, About ABA
available at www.aba.com/About+ABA/default/html (last visited Feb. 13, 2002).
74
Fremont National Bank and Trust Company is located in Fremont, Nebraska. The
company was founded in 1871, and currently has 135 employees and four banking locations.
See Fremont National Bank and Trust Co., at www.fremontnational.com/general/index/.html
(last visited Feb. 13, 2002).
75
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307.
76
The Financial Services Roundtable is a national association that represents 100 of the
largest diversified financial service companies, including sixty-four commercial banking and
thrift organizations, twelve insurance companies, seven securities or investment companies
and four other types of financial service companies. Hearings, infra note 80 (statement of
Richard J. Parsons, Executive Vice President, Bank of America Corporation, on behalf of The
Financial Services Roundtable).
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Board deem real estate brokerage a permissible activity for financial holding
companies.78
Pursuant to the Act, the Federal Reserve Board and the Secretary of the Treasury
consulted with each other and, in January 2001, issued a joint proposed rule and a
request for public comment to determine that real estate brokerage and real estate
management are activities that are financial in nature or incidental to a financial
activity.79 The agencies requested public comment to the proposed rule with an
initial public comment period of sixty days, ending March 2, 2001.80 Due to an
overwhelming number of public comments and at the request of several members of
Congress, the public comment period was extended for an additional sixty days,
expiring May 2, 2001.81 A substantial number of the public comments were the
result of a letter writing campaign against the proposed rule initiated by the National
Association of REALTORS®.82
If the rule is adopted as proposed, it will amend section 225.86 of Regulation Y83
to include real estate brokerage and management services with certain limitations as
permissible activities of financial holding companies.84 As part of the proposed rule,
the Federal Reserve Board and the Secretary of the Treasury defined both real estate
brokerage and real estate management. The rule defined real estate brokerage as
“the business of bringing together parties interested in consummating a real estate
purchase, sale, exchange, lease, or rental transaction and negotiating on behalf of
such parties a contract relating to the transaction.”85 The rule then enumerated a
number of specific activities that would fall under the panoply of real estate
77
“The New York Clearing House Association submitted its request on behalf of The Bank
of New York Company, Inc.; Chase Manhattan Corporation; Citigroup, Inc.; J.P. Morgan,
Inc.; Bankers Trust Company; Fleet Boston, Inc.; HSBC; Bank One Corporation; First Union
Corporation; and Wells Fargo & Company.” Bank Holding Companies and Change in Bank
Control, 66 Fed. Reg. 307, 307 n.2.
78
Id. at 307.
79
Id.
80
Id.
81
Proposal by the Board of Governors of the Federal Reserve System and the Secretary of
the Treasury to Permit Financial Holding Companies and Subsidiaries of National Banks to
Offer Real Estate Brokerage and Management Services: Hearing Before the House Financial
Services Subcommittee on Financial Institutions and Consumer Credit, 107th Cong. (2001).
[hereinafter Hearings] (opening statement of Hon. Spencer Bachus, Chairman, House
Subcommittee on Financial Institutions and Consumer Credit).
82
James R. Peterson, Sizing Up Real Estate Brokerage; First Test of Key GLB Provision
Turns Into a Dustup, ABA BANKING JOURNAL, October, 2001, at 46 (2001).
83
12 C.F.R. § 225.86.
84
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307, 313. While
allowing real estate brokerage and management, the amendment would prohibit financial
holding companies from investing in or developing real estate as principal and from taking
title to, acquiring, or holding any ownership interest in the real estate. Regarding real estate
management services, the financial holding companies would be further prohibited from
directly or indirectly maintaining or repairing the real estate. Id.
85
Id. at 308.
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brokerage, but distinguished real estate brokerage from activities that involve the
purchasing or selling of real estate as a principal.86
The proposed rule defined real estate management as “the business of providing
for others day-to-day management of real estate.”87 Again, the rule enumerated a
number of specific activities considered to be real estate management activities,
including: procuring tenants, negotiating leases, billing and collecting rent payments,
and maintenance of real property.88 In the past, the Federal Reserve Board has
explicitly determined that real estate brokerage and management services were not
closely related to banking for purposes of the Bank Holding Company Act.89 The
question now becomes whether these activities, though not closely related to
banking, are financial activities or incidentally related to financial activities for
purposes of the Gramm-Leach-Bliley Act.
B. The Community Choice in Real Estate Act
Both houses of Congress have recently proposed legislation in response to the
rule proposed by the Federal Reserve Board and the Secretary of the Treasury. On
December 6, 2001, Representative Ken Calvert (R-Cal) introduced H.R. 3424 “to
amend [Section 4 of] the Bank Holding Company Act of 1956 and [Section
5136A(b) of] the Revised Statutes of the United States to prohibit financial holding
companies and national banks from engaging, directly or indirectly, in real estate
brokerage or real estate management activities.”90 On December 18, 2001, Senator
Wayne Allard (R-CO) introduced the mirror image of H.R. 3424 in the Senate.91
These acts are commonly known as the “Community Choice in Real Estate Act,”92
and if passed would moot the Board’s current proposal. While both bills appear to
have bipartisan support, neither bill appears to have the initial support of the
Chairmen of the respective committees, Representative Spencer Bachus93 and
86
Id.
87
Id. at 311.
88
Id.
89
12 C.F.R. § 225.126(c),(g).
90
Community Choice in Real Estate Act, H.R. 3424, 107th Cong. (2001). Section 4 of the
Bank Holding Company Act (12 U.S.C. § 1843) pertains to financial holding companies while
§ 5136A(b) of the Revised Statutes of the United States pertains to financial subsidiaries of
nationally chartered banks. The two statutes are substantially similar in enumerating the
permissible activities.
91
Community Choice in Real Estate Act, S. 1839, 107th Cong. (2001).
92
Community Choice in Real Estate Act, H.R. 3424, 107th Cong. (2001) and Community
Choice in Real Estate Act, S. 1839, 107th Cong. (2001).
93
Chairman of the U.S. House of Representatives Subcommittee on Financial Institutions
and Consumer Credit.
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Senator Paul Sarbanes.94 At the time of this writing, both bills have been referred to
the respective committees, but no other action has taken place.95
V. TWO SIDES TO EVERY STORY
A. Arguments in Favor of Permitting Real Estate Brokerage
and Management Activities
The Gramm-Leach-Bliley Act “neither specifically authorizes nor specifically
forbids financial holding companies or financial subsidiaries of national banks to
engage in real estate brokerage and management activities.”96 The Act does,
however, prohibit financial subsidiaries from engaging in real estate investment and
development.97 According to Laurence Meyer of the Federal Reserve Board, “[t]he
existence of this limited real estate provision in the [Gramm-Leach-Bliley] Act
suggests that the Congress thought about real estate activities in connection with the
[A]ct and determined to leave unresolved the question of whether financial holding
companies or financial subsidiaries should be permitted to act as real estate brokers
or managers.”98
The most ardent supporters for the inclusion of real estate brokerage and
management services among the list of permissible activities for financial holding
companies are members of the banking industry, represented in part by the Financial
Services Roundtable99 and the American Bankers Association.100 These trade groups
have advanced a number of reasons why real estate brokerage and real estate
management services should be determined as financial in nature or incidental to a
financial activity and therefore, permissible under the Gramm-Leach-Bliley Act.101
First, a number of depository institutions already engage in real estate brokerage.102
According to Neil Milner, President and Chief Executive Officer of The Conference
of State Bank Supervisors, “[twenty-five] states and the District of Columbia allow
their state-chartered banks to conduct real estate brokerage. In a number of states
this activity has been allowed for ten to twenty years. In one state . . . the activity
has been allowable for over one hundred years.”103 Proponents of the dual banking
94
Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs.
95
Bank Holding Companies and Change in Bank Control, http://rs9.loc.gov/cgibin/bdquery/z?d107:s.01839: (last visited Feb. 19, 2002); http://rs9.loc.gov/cgibin/bdquery/z?d107:h.r.03424: (last visited Feb. 19, 2002).
96
Hearings, supra note 81 (statement of Laurence H. Meyer, Member, Board of Governors
of the Federal Reserve System).
97
Id.
98
Id.
99
See supra note 76, and accompanying text.
100
See supra note 73, and accompanying text.
101
66 Fed. Reg. 307, 313.
102
Hearings, supra note 81 (statement of Neil Milner, President and CEO, The Conference
of State Bank Supervisors).
103
Id.
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system note that “[t]he ability for state banks to test new products, services, powers
and structures on a state-by-state basis, prior to issuing a broad grant of authority to
institutions nationwide, has identified best practices for the delivery of financial
services that has then been available to federally chartered institutions.”104 Thus,
proponents of the proposed rule assert that a number of state-chartered banks have
effectively engaged in real estate brokerage and management services for years, and
now it is both necessary and appropriate for nationally chartered banks to engage in
the activities as well.105 In addition to state-chartered banks, the Office of Thrift
Supervision has also allowed service corporation subsidiaries of federal savings
associations to provide general real estate brokerage services.106
The proposed rule also notes that “banks and bank holding companies currently
engage in a variety of activities that are functionally and operationally similar to real
estate brokerage.”107 These activities include: securities brokerage services, private
placement services, agency transactional services, and insurance agency services.108
Proponents argue that real estate brokerage services are simply an additional form of
agency services and are essentially no different from the permissible agency services
already offered by banks and bank holding companies.109
In addition to state-chartered banks and nationally-chartered thrifts, many of the
other institutions against which financial holding companies currently compete are
able to offer real estate brokerage services.110 The proposed rule provides several
examples of diversified financial companies that are not subject to the Bank Holding
Company Act that provide real estate brokerage services as well as more traditional
financial services.111
These companies include General Motors Acceptance
Corporation, Prudential Insurance Company, Cendant Corporation, and Long &
Foster.112 Conversely, real estate brokerages are increasingly offering many of the
services traditionally reserved for financial service companies, including, most
notably, mortgage lending and insurance services.113 According to the testimony of
Richard J. Parsons on behalf of the Financial Services Roundtable, nine of the ten
leading real estate brokers cited by Realtor magazine compete with financial holding
104
Id.
105
Id.
106
See Subordinate Organizations, 12 C.F.R. § 559.4(e)(4) (2001).
107
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307, 309.
108
Id.
109
Id.
110
Bank Holding Companies and Change in Bank Control, Fed. Reg. 307, 310.
111
Id. at 310 n.23.
112
Id. In addition to providing real estate brokerage services, the companies engage in the
following activities traditionally considered financial activities: General Motors Acceptance
Corporation operates a thrift and makes mortgage loans; Prudential Insurance Company
provides insurance and securities products; Cendant Corporation provides insurance products
and mortgage loans; and Long & Foster provides mortgage loans and insurance products. Id.
113
Hearings, supra note 81 (statement of Richard J. Parsons, Executive Vice President,
Bank of America Corporation, on behalf of The Financial Services Roundtable).
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companies by offering mortgage loans or insurance.114 Furthermore, fifty-six percent
of residential real estate brokerage firms with more than fifty agents currently offer
mortgage lending services.115 Mr. Parsons further asserts, “the only financial
institutions that uniformly cannot engage in real estate brokerage are financial
holding companies and national banks.”116 Proponents, therefore, view the proposed
initiative to be an attempt to level the competitive playing field, and deem approval
of the regulation as “both necessary and appropriate to allow financial holding
companies to compete effectively with real estate brokerage companies, as well as
with federal thrifts, credit unions, and state banks.”117
Advocates of the proposed regulation also note that the enhanced competition
will benefit consumers.118 Currently, financial holding companies and their
subsidiaries engage in virtually every other aspect of real estate transactions,
including mortgage loans, performing real estate appraisals, providing escrow
services and various insurance products related to real estate transactions, including
title insurance, private mortgage insurance, and homeowner’s insurance.119 Allowing
financial holding companies to offer real estate brokerage and management services
would enable such institutions to provide convenient “one-stop shopping” for
consumers and the increased competition would ostensibly result in lower
transaction costs for consumers as well.120
B. Counter-Arguments of the National Association of REALTORS® and Others
By far, the most vociferous opposition to the proposed regulation comes from the
National Association of REALTORS® (hereinafter “NAR”), an organization that
represents more than 760,000 real estate professionals practicing in all areas of
residential and commercial real estate.121 The organization has referred to the
proposed rule as “The Big Grab”122 and spearheaded a massive letter-writing
campaign against the proposed rule during the public comment period.123
114
Id.
115
Id.
116
Id.
117
Id.
118
Hearings, supra note 81 (statement of Richard J. Parsons, Executive Vice President,
Bank of America Corporation, on behalf of The Financial Services Roundtable).
119
Id. (statement of Laurence H. Meyer, Member, Board of Governors of the Federal
Reserve System).
120
Id. (statement of Richard J. Parsons, Executive Vice President, Bank of America
Corporation, on behalf of The Financial Services Roundtable).
121
Id. (statement of Richard A. Mendenhall, President, National Association of
REALTORS®).
122
See Realtor, www.realtor.org/GAPublic.nsf (last visited Jan. 9, 2002).
123
According to the American Bankers Association, the request for public comment “drew
an astonishing 46,000 letters of comment, mostly from irate realtors.” James R. Peterson,
Sizing Up Real Estate Brokerage; First Test of Key GLB Provision Turns Into a Dustup,
A.B.A. BANKING J., Oct., 2001, at 46.
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The main contention of those opposed to the rule is the belief that real estate
brokerage and management services are clearly commercial in nature, and permitting
banks to engage in such activities would violate the very cornerstone of financial
service industry regulation - the need to separate banking from commerce.124 The
NAR contends, “[r]eal estate brokerage involves the marketing and sale of tangible
property, the very essence of commerce.”125 The organization notes that under the
Bank Holding Company Act of 1956, real estate brokerage and management services
were always deemed commercial activities and therefore, an impermissible ground
for bank holding companies.126 The NAR feels that if real estate brokerage and
management functions are deemed financial activities, there will be no demarcation
between finance and commerce. This belief was echoed by Representative Spencer
Bachus, Chairman of the House Subcommittee on Financial Institutions, when he
said “I believe that the wholesale entry of banks into the real estate business – while
not in and of itself undermining safety and soundness – may serve to erode the longstanding separation between banking and commerce that Congress most recently
reaffirmed in the Gramm-Leach-Bliley Act.”127
A second contention by the rule’s opponents concerns the timing of the request
by the banking industry trade groups, which came approximately one year after the
enactment of the Gramm-Leach-Bliley Act.128 The Act requires the Federal Reserve
Board and the Secretary of the Treasury to consider, inter alia, changes or
reasonably expected changes in both the marketplace and in technology when
determining whether an activity is financial in nature or incidental to a financial
activity.129 The NAR states that “[n]o reasonable observer would suggest that there
has been any significant change in the relevant technology, or in the business of real
estate brokerage or management, since enactment of the [Gramm-Leach-Bliley] Act
in late 1999.”130 In fact, the NAR asserts neither the marketplace nor technology has
changed since debate on the Act began in earnest in the mid-1990’s.131 This,
according to the NAR, coupled with the fact that real estate brokerage and
management services are conspicuously absent from the enumerated list of activities
automatically deemed financial in nature or incidental to a financial activity at the
This was confirmed by a representative of the Federal Reserve Board, who testified that
“the vast majority of the comments have been submitted by individual real estate agents
opposed to the proposal.” Hearings, supra note 81 (statement of Laurence H. Meyer,
Member, Board of Governors of the Federal Reserve System).
124
Hearings, supra note 81 (opening statement of Richard A. Mendenhall, President,
National Association of REALTORS®).
125
Id.
126
Id.
127
Id. (opening statement of Rep. Spencer Bachus, Chairman, House Financial Services
Subcommittee on Financial Institutions).
128
See generally Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307.
129
12 U.S.C. § 1843(k)(3).
130
Hearings, supra note 81 (opening statement of Richard A. Mendenhall, President,
National Association of REALTORS®).
131
Id.
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time of enactment, demonstrates that Congress deemed these activities to be
commercial, not financial.132
The NAR also attacks the argument that the proposed rule will be beneficial to
consumers. The NAR notes that “[t]he real estate brokerage industry is already
characterized by fierce competition, market efficiencies, and ease of entry so that
there is nothing gained by consumers by permitting [financial holding companies’]
entrance.”133 In fact, the NAR argues that the proposed rule would actually have
adverse effects on consumers because financial holding companies and national
banks possess advantages that their nonbank competitors do not possess.134 These
advantages include the protection provided by federal deposit insurance, which
reduces the cost of funds for insured depository institutions, and the special access to
credit from the Federal Reserve and Federal Home Loan Banks, where banks can
borrow at below market rates that are not available to other businesses.135 Opponents
of the rule assert that these advantages would provide a substantial competitive edge
over nonbank real estate brokers, and while this might result in a short-term decrease
in real estate commissions and other transaction costs, the stifling of competition and
limitation of consumer choices would ultimately be at the expense of the
consumer.136
VI. THE PROPOSED RULE HIGHLIGHTS THE INADEQUACIES OF THE
GRAMM-LEACH-BLILEY ACT
A. The Language Employed is Too Broad to Accomplish the Goals of the Act
The debate over whether financial holding companies and financial subsidiaries
of national banks should be permitted to engage in real estate brokerage and
management services is certainly heated, with both sides asserting strong arguments.
Regardless of the outcome, however, the debate has demonstrated some of the
inadequacies in the Gramm-Leach-Bliley Act regarding the addition of permitted
activities.137 The first major criticism of the Act is that the language employed by
Congress is far too broad to accomplish Congress’s goal of expanding the powers of
financial holding companies while maintaining the separation of banking and
commerce. The problem of over-inclusive language was noted by Laurence Meyer
of the Federal Reserve Board, who said that Congress “wrote a very nuanced bill
with a lot of flexibility. On the one hand, [Congress] considered and rejected a broad
mixing of banking and commerce. But . . . provide[d] opportunities for mixing
banking and commerce.”138 In theory, the provision would simply expand the limits
132
Id.
133
Id.
134
Hearings, supra note 81 (opening statement of Richard A. Mendenhall, President,
National Association of REALTORS®).
135
Id.
136
Id.
137
12 U.S.C. § 1843(k).
138
Hearings, supra note 81 (testimony of Laurence H. Meyer, Member, Board of
Governors of the Federal Reserve System).
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of the “closely related to banking” standard, but the practical reality is that the
language employed by Congress provides no real limit to the types of activities that
may be permissible under the Act. In addition to allowing financial holding
companies to engage in activities that are financial in nature, the Act permits those
institutions to engage in activities “incidental to such financial activity”139 or any
activity that is “complementary to a financial activity.”140 Webster’s Dictionary
defines “incidental” as “occurring by chance; of secondary importance; arising out of
something else,”141 while “complementary” is defined as “serving to complete.”142
Thus, the plain language of the statute would allow financial holding companies not
only to engage in financial activities, but also in non-financial activities that simply
arise out of financial activities or serve to complete financial activities. While
Congress has stated that its intention was to expand the scope of financial holding
companies,143 Congress also reaffirmed its intention to uphold the separation between
finance and commerce.144 While in the modern economy it is difficult to determine a
bright line between financial and commercial activities, the demarcation between
those commercial activities that are considered incidental or complementary to
financial activities and those that are not is a far more arduous task.
Several members of the House Subcommittee on Financial Institutions felt that if
the proposed activities are permitted under the Act, it would cause a slippery slope,
resulting in the total mixing of banking and commerce.145 As Robert Nielsen of the
National Association of Home Builders noted, “[i]f this proposal is allowed to go
forward, it would be difficult to predict what activities would not fall under
[financial activities].”146 On numerous occasions throughout the debate, for example,
engaging in real estate brokerage and management activities has been analogized to
engaging in the sale of automobiles.147 An automobile is clearly a tangible asset, as
is a piece of real estate, but the purchase of both types of assets generally involves
some level of financing. Some commentors conjectured that if the current proposal
is accepted, an argument could be made for permitting the sale of automobiles.148
While this proposition may appear far-fetched at first, it may actually be a logical
result of the Act as currently written. Once an activity is identified as a financial
139
12 U.S.C. § 1843(k)(1)(A).
140
12 U.S.C. § 1843(k)(1)(B).
141
WEBSTER’S DICTIONARY OF THE ENGLISH LANGUAGE 489 (1989).
142
WEBSTER’S DICTIONARY OF THE ENGLISH LANGUAGE 200 (1989).
143
Hearings, supra note 81 (statement of Rep. Michael Oxley).
144
Id. (opening statement of Rep. Spencer Bachus, Chairman, House Financial Services
Subcommittee on Financial Institutions).
145
Id. (testimony of Rep. Bob Riley).
146
Id. (statement of Robert Nielsen, on behalf of the National Association of Home
Builders).
147
See generally Hearings, supra note 81.
148
Hearings, supra note 81 (testimony of Rep. Bob Riley). Rep. Riley further asserted, “I
promise you, there is more financial activity in an automobile dealership than there is in any
real estate brokerage company in this country.” Id.
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activity or incidental to a financial activity, it creates a potential nexus of other
activities that are related to the newly permissible activity.149
The statute enumerates several factors that the Board must take into account in
determining whether an activity is financial in nature or incidental to a financial
activity.150 Among these factors are changes in the marketplace or in technology.151
While it is clear that Congress intended to enable financial holding companies to
adapt to changing market and technological conditions, the language employed by
the statute is flawed. The statute actually allows financial activities to be defined, in
part, by market conditions. The danger in such a proposition should be obvious. If
financial activities are defined by the market, the mere fact that a number of lessregulated institutions that compete with financial holding companies engage in a
certain commercial activity could result in that activity being delineated a financial
activity. Laurence Meyer of the Federal Reserve Board noted the difficulties in
applying the provision, saying that “[t]he [Gramm-Leach-Bliley] Act establishes
certain factors that the Board and Treasury must consider, but it otherwise leaves the
agencies with significant discretion and very little guidance regarding what is and
what is not a financial activity.”152 Furthermore, with such broad discretion, it is
unlikely that the judiciary would find that the regulators had exceeded their authority
should a determination that an activity is permissible under the Gramm-Leach-Bliley
Act ever be challenged. Thus it appears that the language employed by the statute is
too broad to limit the power of financial holding companies to activities that are truly
financial in nature or reasonably related to financial activities.
This problem is further complicated by the fourth factor that the Federal Reserve
Board must take into account: “whether such activity is necessary or appropriate to
allow a financial holding company . . . to compete effectively with any company
seeking to provide financial services.”153 Again, this provision requires the
regulators to look to the market to define a financial activity. This provision is even
more expansive than the previous provision for two reasons. First, this factor allows
the regulators to consider whether an activity is either necessary or appropriate for
financial holding companies to compete.154 While it would presumably be difficult
to prove that it is necessary for a financial holding company to engage in a nonfinancial activity in order to compete effectively, proving that it is appropriate for a
financial holding company to compete is a far lower burden. In fact, it would
seemingly be more difficult to prove that an activity engaged in by a competitor of a
financial holding company is an inappropriate activity for a financial holding
company.
This problem is further exacerbated by the remainder of the factor, which
provides that that Board must consider whether the proposed activity would allow
149
Id. (testimony of Rep. Charles Gonzalez).
150
12 U.S.C. § 1843(k)(3).
151
Id.
152
Hearings, supra note 81 (statement of Laurence H. Meyer, Member, Board of
Governors of the Federal Reserve System).
153
12 U.S.C. § 1843(k)(3)(D).
154
Id.
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financial holding companies to compete “with any company seeking to provide
financial services.”155 Again, it appears that the broad language employed by
Congress stretches the scope of the statute beyond what was originally intended.
Under this provision, the competitive marketplace in which financial holding
companies compete consists of any company merely seeking to provide financial
services. Thus, it is not limited to financial holding companies or even companies
primarily engaging in financial activities, but it would presumably include
traditionally “commercial” companies such as manufacturers and retailers that
provide or are seeking to provide financial services as a complement to their existing
business lines.
If the proposed rule is not adopted, the debate is far from over. As previously
mentioned, in addition to the “financial in nature or incidental to [a] financial
activity” standard, the Gramm-Leach-Bliley Act also includes a provision that would
allow banks to engage in any activity that “is complementary to a financial activity
and does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally.”156 Thus, if the banks are not
successful in having real estate brokerage and management services deemed
financial in nature or incidental to a financial activity, they will likely request that the
activities be declared “complementary” activities. The Federal Reserve Board and
Secretary of the Treasury intentionally did not seek public comment on whether the
proposed activities were complementary to financial activity because they were
asked only to define real estate brokerage and management activities as financial in
nature.157 Laurence Meyer, a member of the Board of Governors of the Federal
Reserve System alluded to this likelihood in response to the NAR’s opposition to the
proposed rule, stating that “[i]f one accepts their contention that brokering real estate
is really a commercial activity, the question can then be raised whether real estate
brokerage should be permitted as an activity that is ‘complementary to a financial
activity.’”158
Clearly, many of the arguments both for and against declaring that real estate
brokerage and management services are financial activities would be relevant to a
determination of whether the activities are complementary to a financial activity.
However, in addition to finding a complementary relationship, the Act requires that
the activity “does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally”159 before adding it to the list of
permissible activities. This requires the agencies to conduct further analysis to
determine the effects of the proposed activity on the safety and soundness of not only
banks, but of all participants in the financial services industry.160 While the burden
of establishing a complementary relationship between the activities provided by
155
Id.
156
12 U.S.C. § 1843(k)(1)(B).
157
Hearings, supra note 81 (statement of Laurence H. Meyer, Member, Board of
Governors of the Federal Reserve System).
158
Id.
159
12 U.S.C. § 1843(k)(1)(B).
160
Id.
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banks and other financial service institutions and the activities of real estate
brokerage and management services should be met with relative ease, the National
Association of REALTORS® and other opponents of the proposed rule may have a
legitimate argument regarding safety and soundness concerns.
While a debate on the effect of the proposed rule on the safety and soundness of
depository institutions and the financial system as a whole was not directly relevant
to the proposal, the issue was addressed by some of the parties.161 Richard J.
Parsons, testifying on behalf of The Financial Services Roundtable asserted that
“brokerage poses little risk to the banking system” because a real estate broker acts
solely in an agency capacity, rather than as a principal.162 Thus, the broker does not
have an interest in the property, and only derives fee income from arranging the
transaction. On the surface, it may appear that allowing financial holding companies
to engage in these activities would pose no risk to the safety and soundness of the
institution. However, there are a number of situations where engaging in real estate
could potentially pose a risk to safety and soundness. For example, a bank may be
tempted to underwrite a mortgage that is below its normal standards if it is able to
increase its overall return with a real estate brokerage fee. If the bank adopted this
practice, it could potentially affect the overall soundness of the institution. The
problem, however, is that the statute only excludes activities that pose a substantial
risk to safety and soundness of the financial institution. While arguments can be
made that a particular activity, such as real estate brokerage or management, poses a
risk to the safety and soundness of a financial institution, meeting the burden of
“substantial risk” would be difficult. It is clear that Congress intended to expand the
scope of permissible activities beyond what was permissible under the “closely
related to banking” standard. It is equally clear, however, that by using terms such
as “incidental,” “complementary,” “necessary or appropriate,” and “substantial risk,”
the statute goes beyond what was originally intended by the drafters, who sought to
maintain the separation between finance and commerce.163
B. The Roles of the Legislature and Regulators are Not Clearly Defined
A second major criticism of the Gramm-Leach-Bliley Act is that the roles of the
legislature and the regulators are not clearly defined in the Act. This is demonstrated
by the proposed rule and the testimony regarding the rule.164 The actual language of
the rule does not indicate a strong sentiment by the agencies proposing the rule that
the activities are in fact financial activities or incidentally related to a financial
activity.165 The proposed rule appears to be a request for additional information
rather than a statement of position.166 This issue was discussed during a hearing on
161
Hearings, supra note 81 (statement of Richard J. Parsons, Executive Vice President,
Bank of America Corporation, on behalf of The Financial Services Roundtable).
162
Id.
163
Hearings, supra note 81 (statement of Rep.Waters).
164
See generally Hearings, supra note 81; Bank Holding Companies and Change in Bank
Control, 66 Fed. Reg. 307 (Jan. 3, 2001) (to be codified at 12 C.F.R. pt. 225).
165
Id.
166
Id.
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the rule in the House Subcommittee on Financial Institutions, when Rep. Melvin
Watt (D-NC) specifically asked Donald Hammond167 whether someone in the
Treasury actually advocated the proposed rule or if it “would in effect be a rule
promulgated for debate purposes to clarify the law?”168 Mr. Hammond responded
that the rule was proposed in order to interpret the statute, stating that the issue of
whether real estate brokerage and management services were financial activities or
incidentally related to financial activities “very clearly met a threshold standard, that
the request came in, [and] met enough of the statutory requirements to put it forward
as a proposal.”169 He further noted that between the time the rule was initially
proposed and the time of the hearing, the Administration had changed, so the
sentiment of the Department of Treasury may have changed as well.170 Laurence
Meyer, representing the Federal Reserve Board, testified that it was not crucial that
the agencies advocate the position, so long as the request was reasonable enough to
seek public comment.171 He added, however, that the proposals are usually
supported “by some sense of advocacy.”172 Further, it was the understanding of the
agencies that the proposition of a rule was the proper mechanism for determining
whether an activity was within the parameters of the Gramm-Leach-Bliley Act, and
that after agreeing that a threshold case could be made, the agencies “put it out in this
form to get the discussion going, to get feedback from practitioners, from market
participants from both sides to help us sort out the issues and hopefully make a very
informed decision.”173 From these statements by the representatives of the Federal
Reserve Board and the Secretary of the Treasury, it is unclear as to the level of
support for the proposed rules from the respective agencies. What is clear, however,
is that the statute is ambiguous as to when a proposal should be issued.174
This lack of clarity has already led to tremendous inefficiencies. While the
Federal Reserve Board and the Secretary of the Treasury issued the proposed rule
primarily as a solicitation of public comment, both houses of Congress have
responded with proposed legislation to render the proposed rule moot.175 These
resolutions have been referred to the appropriate committees and are pending further
167
Donald V. Hammond is the Acting Under Secretary for Domestic Finance, Department
of the Treasury.
168
Hearings, supra note 81 (testimony of Rep. Melvin L. Watt).
169
Id. (testimony of Hon. Donald V. Hammond, Acting Under Secretary for Domestic
Finance, Department of the Treasury).
170
Id.
171
Id. (statement of Hon. Laurence H. Meyer, Member, Board of Governors of the Federal
Reserve System).
172
Id.
173
See generally Hearings, supra note 81.
174
Id.
175
Community Choice in Real Estate Act, H.R. 3424, 107th Cong. (2001); Community
Choice in Real Estate Act, S. 1839, 107th Cong. (2001).
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action.176 Clearly, Congress would not have vested the regulatory agencies with the
authority to determine that activities were permissible under the Gramm-LeachBliley Act if it intended to enact separate legislation in response to each proposed
rule. However, because the roles of both the regulators and the legislature were not
clearly defined in the Act, that is exactly what has resulted.
C. The Scope of the Rule is Too Expansive
One of the major differences between the “closely related to banking” standard
under the Bank Holding Company Act and the “financial activity or incidentally
related to a financial activity” standard under the Gramm-Leach-Bliley Act is the
scope of its effect. Prior to the enactment of the Gramm-Leach-Bliley Act, “the law
directed the Board to consider whether banks engaged in the activity, but did not
explicitly authorize the [Federal Reserve] Board to consider whether other financial
service providers engaged in the activity.”177 The enactment of the Gramm-LeachBliley Act, however, “represents a significant expansion of the Board’s capacity to
consider the competitive realities of the U.S. financial marketplace in determining
the permissibility of activities for [financial holding companies].”178 As previously
stated, twenty-five states and the District of Columbia currently permit their statechartered banks to engage in real estate brokerage.179 If financial holding companies
and financial subsidiaries of national banks are permitted to engage in these
activities, they would arguably be able to more adequately compete with the statechartered banks in the states where such activities are currently permitted.
Conversely, however, it would appear that the newly empowered financial holding
companies and national banks would have a competitive advantage over statechartered banks in the states where these activities are currently impermissible. It is
likely, then, that the states that have historically not permitted real estate brokerage
and management by banks would be pressured by the state banks to amend their
current regulations to allow banks to engage in previously impermissible activities.
Those states that do amend their regulations may do so contrary to the reasons that
have kept them from amending their regulations prior to the current proposal. Those
states that do not amend their regulations to permit state banks to offer real estate
brokerage and management services could be hurt as state-chartered institutions lose
market share to potentially out-of-state financial holding companies.
Further exacerbating the issue is the fact that many states have “wild card
statutes,”180 which would automatically permit state-chartered banks to engage in any
activity permissible for a national bank or financial holding company, taking the
power to decide on the issue away from state regulators. This could create a
176
Bill Summary and Status for the 107th Congress,
bin/bdquery/z?d107:s.01839: (last visited Feb. 19, 2002);
bin/bdquery/z?d107:h.r.03424: (last visited Feb. 19, 2002).
http://rs9.loc.gov/cgihttp://rs9.loc.gov/cgi-
177
Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307, 309.
178
Id. at 309-10.
179
Hearings, supra note 81 (statement of Neil Milner, President and CEO, The Conference
of State Bank Supervisors).
180
Henry N. Butler & Jonathan R. Macey, The Myth of Competition in the Dual Banking
System, 73 CORNELL L. REV. 677, 705 (1988).
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multitude of problems, as state-chartered banks could engage in these activities
without adhering to the heightened requirements of financial holding company
status. As currently written, the rule does not include any provisions that would limit
the scope of the Act to applicable state laws, therefore preserving the integrity of the
dual banking system.181
VII. CONCLUSION
The rule to permit financial holding companies and financial subsidiaries of
nationally chartered banks to engage in real estate brokerage and management
activities was proposed over a year ago, and there is no indication that the issue will
be resolved in the very near future.182 Regardless of how the issue is finally resolved,
the current debate has highlighted some of the inadequacies of the provision in the
Gramm-Leach-Bliley Act that provides for the expansion of the list of permissible
activities for financial holding companies. Among these inadequacies are the overly
broad language of the statute, the ambiguously defined roles of the regulatory
agencies, and the expansive scope of the provision. When enacted, the GrammLeach-Bliley Act had the strong support of the legislature, regulatory agencies,
industry groups and consumer groups,183 but if the above-listed deficiencies are not
addressed, the effectiveness of the Act could be severely compromised.
The most efficient and effective manner in which to correct the perceived
inadequacies of the Act would be for Congress to amend the provisions expanding
the list of permissible activities. Throughout the debate on the issue, there has been a
clear sentiment in Congress that the broad language and ambiguities of the Act
should be addressed by the legislative branch rather than leaving it to the
interpretation of the regulatory agencies of the executive branch.184 This sentiment is
evidenced by the comments made by a number of legislators during the House
subcommittee hearings, as well as the by the pending bills in the House and Senate.
It is not uncommon for a law to be amended shortly after its promulgation if the
effects of the law are not commensurate with the intent. Some members of Congress
have suggested that the provisions of the Act allowing for the expansion of
permissible activities may need to be amended as well. In his opening statement
during the hearing on the issue, Rep. Paul Kanjorski stated, “[i]f the agencies fail to
deliberate on this issue judiciously, Congress may find itself again considering
legislation designed to close the loopholes created by their regulatory excess.”185
Later in his testimony, he accused the regulatory agencies of expanding the authority
beyond what was intended and actually granted by Congress.186 Rep. Brad Sherman
also felt that permitting financial holding companies to engage in real estate
181
See generally Bank Holding Companies and Change in Bank Control, 66 Fed. Reg. 307.
182
Id.
183
See Dee DePass, Stocks Rise as Clinton Signs Finance Reform Bill Into Law; Wall
Street Expects Measure to Prompt Flurry of Mergers, MINNEAPOLIS STAR TRIBUNE, Nov. 13,
1999, at 1D.
184
See generally Hearings, supra note 81.
185
Hearings, supra note 81 (statement of Rep. Paul E. Kanjorski).
186
Id.
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brokerage and management activities exceeded the authority of the regulating
agencies, saying that if the Gramm-Leach-Bliley Act were to be dramatically
expanded, it should be done by Congress, “and there shouldn’t be an end run around
the authority of Congress where we are told less than a year after we pass a bill it
needs to be updated by putting something into it that many of us who supported the
bill never intended.”187
The first step in the amendment process would be to narrow the language of the
provisions to more accurately match the actual intent of Congress. It seems clear
that if financial holding companies are permitted to engage in activities that are only
“incidental” or “complementary” to a financial activity, involvement in such
activities should be more restricted than involvement in true financial activities. The
extent to which these activities are to be limited, perhaps via increased capital
requirements for subsidiaries engaging in these activities or a limitation on the
percentage of net income a financial holding company could derive from such
activities, is beyond the scope of this Note. However, simply limiting the power to
engage in “incidental” or “complementary” activities should greatly reduce the room
for abuse under the Act.
Next, Congress should amend the factors that the agencies must consider “[i]n
determining whether an activity is financial in nature or incidental to a financial
activity.”188 While it seems reasonable for the agencies to consider changes in the
marketplace and technology when determining the permissibility of an activity, it is
very dangerous that a financial activity could actually be defined by the market.
Thus, Congress might allow financial holding companies to engage in non-financial
activities based on competitive factors, but any involvement in such activities should
be severely limited to what is absolutely necessary for the financial holding
companies to compete.
Finally, when considering “complementary” activities, Congress should limit the
ability of financial holding companies to engage in such activities beyond only those
that “pose a substantial risk to the safety or soundness” of a bank.189 It has already
been established that “complementary” activities are wholly commercial activities
that simply serve to complete financial activities.190 These activities clearly would
not have been permissible prior to the Gramm-Leach-Bliley Act and do indeed
involve a mixing of banking of commerce. Therefore, it would seem reasonable to
prohibit involvement in such activities that pose “moderate” or even “significant”
risks to the safety or soundness of banks. While terms such as “moderate” and
“significant” would be subject to interpretation, they would clearly be more
restrictive than the present “substantial risk” standard.
The second major initiative for Congress should be to further define the role of
the regulatory agencies in the process of expanding the list of permissible activities
under the Gramm-Leach-Bliley Act. While the Act seemed to clearly describe the
process to be followed by the Federal Reserve Board and Secretary of the Treasury
upon a request for a determination of whether an activity is permissible under the
187
Id. (testimony of Rep. Brad Sherman).
188
12 U.S.C. § 1843(k)(3).
189
12 U.S.C. § 1843 (k)(1)(B).
190
See supra note 141.
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Act,191 it is clear from the subsequent testimony that confusion exists among the
parties involved. Improving the language of the statute, as recommended above,
should serve to minimize much of the confusion. However, Congress should also
explicitly provide the criteria necessary before a public rulemaking is proposed. As
previously noted, both the Federal Reserve Board and the Secretary of the Treasury
interpreted the statute to require a request for public comment once a threshold case
is made by the party requesting that a determination be made.192 It seems apparent
from the testimony and subsequent comments by members of Congress, however,
that it was their intention that the agencies actually make a determination that an
activity is financial in nature or incidentally related to a financial activity before
proposing a rule.193 Resolving this ambiguity would minimize the inefficiencies of
agencies proposing rules that they do not actually advocate and Congress in turn
proposing legislation against proposed rules that seem contrary to their intent.
The final step in the amendment process would be to attempt to limit the effect of
the provisions. It seems clear that adding to the list of permissible activities for
financial holding companies will dramatically change the competitive landscape for
all companies providing financial services. Congress can limit the scope of the Act
by requiring that such activities be “conducted pursuant to applicable state laws.”194
If Congress amends the provisions of the Gramm-Leach-Bliley Act as suggested, the
law will more closely reflect the original intent of Congress and would remain an
invaluable vehicle for adapting to changes in the financial services industry for years
to come.
PATRICK J. BURKE195
191
12 U.S.C. § 1843 (k)(2).
192
Hearings, supra note 81 (testimony of Laurence H. Meyer, Member, Board of
Governors of the Federal Reserve System and Hon. Donald V. Hammond, Acting Under
Secretary for Domestic Finance, Department of the Treasury).
193
Id. (testimony of Rep. Melvin L. Watt).
194
Id. (statement of Neil Milner, President and CEO, The Conference of State Bank
Supervisors).
195
The author would like to thank Professors William Tabac and Beverly Blair of the
Cleveland-Marshall College of Law for their insight and instruction. Special thanks to Brandy
Burke whose unconditional encouragement and support made this Note possible.
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